Blockholder mutual fund participation in private in‐house meetings

• Published date: 01 September 2023
• Author: Robert M. Bowen,Shantanu Dutta,Songlian Tang,Pengcheng Zhu
• Date: 01 September 2023
• DOI: http://doi.org/10.1111/jfir.12327

Received: 25 March 2022

|

Accepted: 28 February 2023

DOI: 10.1111/jfir.12327

ORIGINAL ARTICLE

Blockholder mutual fund participation in private

in‐house meetings

Robert M. Bowen

1,2

|Shantanu Dutta

3

|Songlian Tang

4

|

Pengcheng Zhu

5

1

Argyros School of Business & Economics,

Chapman University, Orange, California, USA

2

Department of Accounting, University

of Washington, Seattle, Washington, USA

3

Telfer School of Management, University

of Ottawa, Ottawa, Ontario, Canada

4

Glorious Sun School of Business and

Management, Donghua University, Shanghai,

China

5

Knauss School of Business, University

of San Diego, San Diego, California, USA

Correspondence

Robert M. Bowen, Professor of Accounting,

Argyros School of Business & Economics,

Chapman University, One University Drive,

Orange, CA 92866, USA.

Email: rbowen@chapman.edu

Funding information

National Natural Science Foundation of

China, Grant/Award Number: 71672059;

Social Sciences and Humanities Research

Council (SSHRC) of Canada,

Grant/Award Number: 435‐2018‐1510

Abstract

The Shenzhen Stock Exchange (SZSE) in China is unique

worldwide in requiring disclosure of the timing, partici-

pants, and selected content of private in‐house meetings

between firm managers and outsider investors. We

investigate whether these private meetings benefit hosting

firms and their major outside institutional investors—

blockholder mutual funds (i.e., funds with ownership

≥5%). Using a large data set of SZSE firms, we find that

blockholder mutual funds have more access to private in‐

house meetings, and top management is more likely to be

present, especially when a meeting is associated with

negative news. Furthermore, when blockholder mutual

funds attend negative‐news meetings with top manage-

ment, they are less likely to sell shares, their investment

relationship with the hosting firm lasts longer, and hosting

firms experience lower postmeeting stock return volatility.

These findings suggest that private in‐house meetings are

an informative disclosure channel that improves social

bonding between top management and blockholder mutual

funds in ways that benefit hosting firms.

JEL CLASSIFICATION

G18, G38, K22, M41, M48

J Financ Res. 2023;46:631–679. wileyonlinelibrary.com/journal/JFIR

|

631

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and

reproduction in any medium, provided the original work is properly cited.

© 2023 The Authors. Journal of Financial Research published by Wiley Periodicals LLC on behalf of The Southern Finance

Association and the Southwestern Finance Association.

“For the past 15 years, selective disclosure by companies has been illegal under U.S. securities rules.

Yet the same rules explicitly allow private meetings like those by P&G. The result is a booming back

channel through which facts and body language flow from public companies to handpicked recipients.”

Ng and Troianovski (2015)

1|INTRODUCTION

Private in‐house meetings, a murky voluntary private communication channel, are held at corporate sites with

a select group of investors and sell‐side analysts.

1

Investors incur effort and expend resources to attend these

meetings, suggesting that they expect the experience to be informative and cost effective. These meetings

are different from other management–investor interactions such as investor conferences in that they are

generally not publicized in advance and their content may never become public. Unlike traditional public

financial disclosure channels (e.g., conference calls, social media, and periodic financial reports), private

meetings are not supposed to disseminate material new information.

2

Firms experience negative

consequences when disclosing material information in private settings.

3

Despite the advent of fair disclosure regulations, Solomon and Soltes (2015)observethat“managers continue to spend

a large amount of time meeting privately with investors at public conferences, investors' offices, and the headquarters of firms”

(p. 326). Investors generally request these private meetings to collect nonpublic, nonmaterial (“mosaic”) information about a

company and its management to inform their decisions. Although apparently commonplace (e.g., Ng & Troianovski, 2015),

we know little about the communication strategy underlying these private meetings and the extent to which they bene fit

the firms and investors that participate inthem.Theliteraturemainlyfocusesontheinformativenessofprivatemeetingsto

capital markets and financial analysts (e.g., Cheng et al., 2016,2019; Han et al., 2018). We examine whether managers at

firms that host private meetings use these meetings to improve social bonding with in stitutional investors in ways that

mitigate the effects of negative market sentiment on stocksell‐offs and stock return volatility. We use the SZSE in China

forourstudybecauseitistheonlyregulatorybodyintheworldthatrequiresdisclosureofprivatein‐house meetings.

4

Although a firm's ownership structure can include different types of institutional investors, we expect that

firm management and institutions with relatively large active ownership (i.e., blockholder funds with at least

5% ownership

5

) have a strong mutual interest in these private meetings. Our conjecture is rooted in traditional

1

Private in‐house meetings are also known as site visits (Cheng et al., 2019); both terms are used interchangeably in the original

disclosure documents on the Shenzhen Stock Exchange (SZSE) website.

2

For example, US Regulation Fair Disclosure (Reg FD) prohibits firms from selectively disclosing new material information to

outsider investors under any circumstances including private meetings. China's regulatory authority (China Securities Regulatory

Commission) and the SZSE follow the spirit of Reg FD and prohibit firms from privately discussing any new material information with

stakeholders outside the firm (Bowen et al., 2018; SZSE, 2006). These regulations do not prohibit the selective disclosure of

nonmaterial information (Koch et al., 2013).

3

Cheng et al. (2019) state that the SZSE publicly denounces companies that disclose material non‐public information to select

institutional investors. Note that denouncement is a typical form of regulatory sanction in China, and it is not taken lightly by companies or

investors. Research documents that denouncements lead to negative market reactions, restricted access to bank loans, higher loan spreads,

increased likelihood of receiving qualified audit opinions, and increased audit fees (Yang and Xie 2008; Zhu and Wu 2009; Chen

et al. 2011). (p. 363).

4

The SZSE is the second largest stock exchange in China behind the Shanghai Stock Exchange. According to Statista.com,asof

December 2021, the SZSE is the 6th largest stock exchange in the world in market capitalization of listed companies at US$6.54

billion.

5

The literature has commonly used a 5% cutoff as a proxy for blockholder ownership (Dlugosz et al., 2005; Duo et al., 2018; Edmans

& Manso, 2011). Although blockholder funds are relatively rare in China, their relationship with management is more likely to

influence corporate policies (e.g., Firth et al., 2016) and shareholder voting (e.g., Song et al., 2020). Although blockholders with >5%

ownership are considered to be “insiders”according to China Securities Regulatory Commission Regulation No. 56 (2007) and China

Securities Law (2019), their trades are not considered illegal unless they are informed by nonpublic material information.

632

|

JOURNAL OF FINANCIAL RESEARCH

agency theory, which “suggests that blockholders are more motivated to, for instance, initiate shareholder‐sponsored

meetings and private negotiations, when they have relatively more concentrated control in the firm (Fama and

Jensen, 1983; Jensen and Meckling, 1976)”(Chen et al., 2019, p. 89).

The largest institutional ownership in Chinese firms is held by mutual funds (Jiang & Kim, 2015; Yuan

et al., 2008). The combination of increasing levels of ownership by mutual funds and their short investment

horizons can pose disclosure challenges for firm managers. On one hand, increased information disclosure through

private meetings can amplify stock return volatility. For example, Bushee and Noe (2000) state that “attracting

institutional ownership with improved disclosure is not always beneficial and managers faced with decisions about

whether to change their firms' disclosure practices should weigh any potential benefits of improved disclosure quality

against the possibility of exacerbating stock return volatility”(p. 174). On the other hand, firm managers may use

private in‐house meetings to develop a social bond (i.e., a trusted relationship) with blockholder funds (Elliott

et al., 2018). Trust can allay investors' concerns about potential negative developments (Hutton et al., 2003), which

we predict will strengthen the management–blockholder relationship, reduce stock sell‐offs by blockholder funds,

and lower stock return volatility following private meetings, especially those that contain negative news.

6

We differentiate our study from prior research as follows. First, Elliot et al. (2018) examine social bonding in a

social media setting using a lab experiment design. In contrast, we study actual private meetings that are accessible

only to a select group of mainly large institutional investors and analysts. Second, none of the private meeting

studies consider the quality of the relationship between firm management and large institutional investors as a key

attribute of these meetings. In contrast, most studies focus on informativeness of private meetings to the capital

markets and financial analysts. Third, we use a comprehensive cross‐sectional data set to examine the dynamics

between mutual funds and SZSE‐listed firms surrounding private in‐house meetings. In contrast, earlier studies

either evaluate voluntary public disclosures or focus on other participants, such as financial analysts (e.g., Cheng

et al., 2016; Han et al., 2018) or corporate insiders (Bowen et al., 2018). Although Cheng et al. (2019) consider

mutual fund participation in private meetings, they do not differentiate between blockholder funds and funds with

little or no ownership, and thus do not focus on the interaction between top management and these potentially

influential investors. We argue that managers are likely to use different communication strategies for blockholder

(vs. nonblockholder) funds. Fourth, most studies either (1) assume that voluntary disclosures contain positive

information (Kothari, Shu, & Wysocki, 2009) or (2) do not differentiate between positive and negative disclosures

(Cheng et al., 2019).

7

In contrast, we observe that over 50% of private meetings reported by SZSE‐listed firms

experienced negative stock price reactions in the 5 days (−2 to +2 days) surrounding the meeting. This suggests that

most private meetings are associated with negative information. Negative‐tone meetings are especially important

for both investors and firm management, as negative news generally has a greater effect on investors' mindsets and

trading activities (Loughran & McDonald, 2011). Top management is also likely to pay particular attention when

reporting negative news in the presence of blockholder funds because this could negatively affect management's

personal compensation, reputation, and career development (Graham et al., 2005; Mergenthaler et al., 2012).

Meeting privately with influential blockholders provides managers an opportunity to explain the context of negative

developments, address investors' concerns, and further develop a trusted relationship (Elliott et al., 2018). Fifth, to

the best of our knowledge, we are the first to examine the communication strategy used by top management

in private meetings. By focusing on the private interactions between firm management and influential

blockholder funds, we examine the importance top management puts on (1) attending private meetings with key

6

In the context of Chinese markets, management of stock return volatility remains an important concern for both firm managers and

investors. As Chen et al. (2018) point out, “compared with a mature market such as the U.S. market, the Chinese market is quite volatile

and experiences frequent sharp rises and falls, with a monthly stock market volatility reaching 9.65% compared with 4.45% on the S&P

500 between 1996 and 2015”(p. 4).

7

In this context of our article, the term “voluntary disclosure”refers to corporate disclosures that are not mandated by existing

regulations. Thus, any information revealed through private interaction between firm management and investors is considered to be

voluntary. Of course, voluntary disclosure can be made through public as well as private channels.

BLOCKHOLDER MUTUAL FUND PARTICIPATION

|

633